What The Heck Is The Granite Wash?

Investors who thought they had mastered all the up and coming oil and gas basins in the U.S. may have to go back to the drawing board, as several exploration and production companies are reporting strong results in a resource play called the Granite Wash.

Investors in the energy sector practically need a degree in geology to keep track of all the various producing basins in North America. There are conventional and unconventional plays, shale and non-shale, oil sands and oil shale.

The WashThe Granite Wash is located in the Northern Texas panhandle and in Western Oklahoma, and is present in several different zones at depths from 11,000 to 12,500 feet deep. The term Granite Wash refers to the weathering process that granite underwent over time, and is another name for the sandstone created during that process.

Forest Oil (NYSE:FST) reported on a recent horizontal well in the Greater Buffalo Wallow area that was drilled into the Granite Wash. The well had an initial production rate of 17 MMcfe per day (million cubic feet of equivalent per day), and Forest drilled a 3100 foot lateral extension, at a total well cost of $6.8 million. Although this is not a shale formation, Forest used an eight stage hydraulic fracturing process on the well to stimulate production. The company has done eight other horizontal wells into the Granite Wash, with an average initial production test rate of 7.8 MMcf per day.

The company's most recent well was more successful than that of other operators who are developing the area. Craig Clark, the CEO of Forest Oil, attributed that success to choosing the correct interval and the multi stage hydraulic fracturing job the company performed.

St. Mary's Land and Exploration (NYSE:SM) revealed during its first quarter conference call that it had "a very large position" in the Granite Wash. The company said that most of this land is "held by production," which means the company has existing wells on the acreage and does not have to drill to other zones immediately. (These events offer the average investor a chance to hear management respond to analysts' hard-hitting questions; see Conference Call Basics.)

Another advantage to the Granite Wash area is the high amount of natural gas liquids that are produced, which can be sold as well into the market by operators. Natural gas liquids include propane, butane, pentane, hexane and heptane. Also, some operators are using a first-year decline rate of 50-60% in the Granite Wash. This gives it an advantage compared to the 80% decline rates for shale plays.

Penn Virginia (NYSE:PVA) is another operator with assets in the Granite Wash. During its first quarter operational update, the company said that it has drilled 18 gross wells so far in the Granite Wash. Its average initial production rate is 10.1 MMcfe per day, and it has reduced its well cost to $6.3 million. This is 25% less than when it began developing the area.

Cimarex Energy (NYSE:XEC) also has properties in the Granite Wash. During its first quarter earnings conference call, Thomas E. Jorden, an executive in charge of exploration for the company said the wash was "extremely predictable from drilling costs, reserves and production standpoint," but that the company needed higher gas prices to get more aggressive. (Drill down into financial statements to tap into the right companies and let returns flow; read Unearth Profits In Oil Exploration And Production.)

All this drilling into the Granite Wash will eventually lead to the need for more infrastructure to process and transport the natural gas. A small cap company that already has midstream assets in the Texas Panhandle area is Eagle Rock Energy Partners LP (Nasdaq:EROC). Eagle Rock owns 3,800 miles of pipeline and seven processing plants here. Investors should note that Eagle Rock is undergoing issues with liquidity and debt, and just voluntarily reduced its distribution from 41 cents to 25 cents per unit.

The Granite Wash is another emerging natural gas play in North America, as recent production results are attracting the attention of the exploration and production industry.